NYSE Merger May Lower Costs, Widen Investor Access

Wednesday, 16 Feb 2011 09:17 AM

 

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The New York Stock Exchange will be acquired by Deutsche Boerse, owner of the Frankfurt stock exchange. The merger will create the world's largest financial markets company.

Yet the name of the new company hasn't been announced. The omission reflects the amount of symbolism that's wrapped up in the deal. Politicians are already weighing in on the importance of retaining the NYSE name in some form.

Under the proposed terms, Deutsche Boerse shareholders will own 60 percent of the combined company and NYSE Euronext Inc. shareholders will own the remaining 40 percent. The reality is that NYSE Euronext is already a global company that owns the New York Stock Exchange and various stock and derivatives exchanges across Europe.

Although there are plenty of regulatory hurdles to cross, here are a few ways the deal could affect investors:

• Greater access to investments.

A wider range of investments seems like an inevitable result. But will that mean mutual fund managers will embrace the shares of French or German companies? How about individual investors who want some international flavor in their portfolio?

The answer is that they might, but not right away, says Ulf Nielsson, assistant professor of finance at the Copenhagen Business School in Frederiksberg, Denmark.

Nielsson studied the 2000 merger of the Amsterdam, Brussels, Lisbon and Paris exchanges, which formed Euronext, to determine the impact on the companies operating the exchanges. Euronext later merged with the NYSE in 2007.

One key reason for delayed access is the time it will take for the two companies to integrate their trading systems — a process that could take years.

What's more, the additional liquidity that could come from an international pool of investors won't be enjoyed across the board.

When cross-border trading occurs, it typically involves large recognizable companies, Nielsson says. Investors on both sides tend to focus on familiar, well-established names, meaning that small- and midsize companies generally don't benefit as much from the access to new investors.

• Lower trading costs.

The merger is expected to lead to annual savings of more than $400 million from economies of scale in information technology and various other operations. However, it's unlikely those savings will be passed down to investors, says James Angel, associate professor of finance at Georgetown University.

"Transaction costs are already so low that you're not really going to notice any difference," he says. "The exchanges still face incredibly intense competition from all the other trading platforms, so that's not going to change."

• NYX share value rises.

If you own a stake of the NYSE, you might benefit from the deal.
Shareholders in NYSE Euronext have seen shares climb about 3.5 percent since news of the merger talks emerged last Wednesday to Monday's close. Shares slipped 3.4 percent, however, on Tuesday after the announcement was made.

Similarly shares of Deutsche Boerse surged 7 percent to yesterday's close of $61.35. They fell about 2 percent Tuesday.

The deal doesn't appear to have too much of a downside, says Hank Smith, portfolio manager and chief equity investment officer for The Haverford Trust Co. in Philadelphia. Each share of NYSE Euronext stock will be exchanged for 0.47 share of the new company. Smith believes stockholders may end up with a company trading in the low 40s.

Smith's portfolio holds about 2 million shares of NYSE Euronext, much of it acquired in 2009 at about $20 a share.

Still he isn't counting his profits just yet: "I think this is going to be a long regulatory slog."

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